The USD/PKR is now under a “market-based regime as opposed to a tightly managed float earlier. It is difficult to put a number on where the exchange rate will settle, but pressure on the exchange rate may not go away until the current account deficit remains elevated (it is currently averaging US$1bn per month and needs to be US$500mn per month or lower, in our view so that Fx reserves start to build up consistently).
After independence, the PKR was pegged to the British Pound. In the 1970s, the PKR was pegged to the US$. These pegs were removed in the early 1980s and Pakistan has been under a managed float regime since then. In practice, this meant keeping the PKR value unchanged for a long period by drawing down Fx reserves, before macroeconomic shocks and/or political disruptions inevitably led to an end to this strategy.
The next 6-12 months will be tough as the public will face higher inflation and higher interest rates.
As a result, the PKR’s graph vs. the US$ has resembled a ladder since the 1980s. It is only now that the authorities have loosened their tight control on the currency, which is why the PKR is moving every day. Soon, we will become used to it particularly as the PKR is now free to move in either direction (appreciation or depreciation), with the SBP only going to intervene in case of excessive volatility. Unfortunately, Pakistan has lived beyond its means for several decades and it must now go through a period of belt-tightening and greater macroeconomic discipline.
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The next 6-12 months will be tough as the public will face higher inflation and higher interest rates. However, important structural reforms have started, for instance, the FY20 Budget encourages a better tax culture while also clamping down on unproductive activities such as the trading of immovable property. Once Pakistan is out of this tough phase, it can embark on more sustainable and equitable growth.
Raza Jafri possesses over 10 years of experience in sell-side equity research. He is currently associated with Intermarket Securities Limited. Earlier, he was the Head of Research at AKD Securities Limited. He was awarded “Best Analyst of the Year 2015/16” by CFA Society Pakistan and was also recognized for “Best Banks Coverage” by AsiaMoney in 2012. Mr. Jafri graduated with a B.Sc in Accounting & Finance from the Lahore University of Management Sciences, is a CFA charter holder and also serves on the Board of the CFA Society Pakistan.